Retail

Home Depot raises full-year profit forecasts

'The worst of the correction is behind us,' CEO Blake says

NEW YORK (MarketWatch) -- Home Depot Inc., the world's largest home-improvement retailer, raised its profit forecasts for the year Wednesday based on improvements in customer service and merchandise assortment, as well as lower costs.

In an interview, Chief Financial Officer Carol Tome said sales in May, the company's biggest selling month of the year, exceeded its expectations -- boosted by demand for outdoor products from plants and mulch to grills and lower-priced patios.

"Sales were still down from last year, but not as bad as the first quarter or our projection," she told MarketWatch. "The high end is still weak. We feel very good about what we are doing in the space. We need to turn to positive sales."

While mixed economic signals remain, Chief Executive Frank Blake said at the company's analyst and investor conference Wednesday that the "worst of the correction" in the housing market is past after private, fixed-residential investment as a percentage of the gross domestic product reached 2.7% in the first quarter, its lowest level in 60 years, compared with an average of 4.8% during the same period a year ago.

"Our performance has correlated fairly closely with this indicator over the last several years. It suggests, as we have planned, that we should see sequential improvement in our [same-store sales] performance -- though still only 'less bad' -- through the year," he commented. The meeting was broadcast live online.

Home Depot
HD, -0.32%
has increased compensation for its hourly staff, increased training and cut the number of reports store managers receive to help bolster morale and improve customer service, according to executives at the conference hosted in Atlanta, where Home Depot is based. The company also has given local stores more authority to make more merchandising and marketing decisions and increased the number of regional merchandising managers to better localize assortment. In addition, Home Depot is hiring more bilingual staff and intensifying marketing to attract the faster-growing Hispanic population.

On the back end, Home Depot is adding new software in areas including forecasting and markdowns to help control inventory and reduce discounts, updating company systems from what its technology chief, Matt Carey, described was akin to those from 1991. Home Depot named Carey, a former executive at eBay Inc.
EBAY, +1.85%
and Wal-Mart Stores Inc.
WMT, -0.56%
to that post in September.

Home Depot is shipping more merchandise from new regional distribution centers, instead of directly from suppliers, as it has done in the past. The rollout of the so-called rapid deployment centers will be completed by the end of next year.

Internal social networking

The company also has shut stores and cut prices on hundreds of products among its 40,000 items to draw increasingly budget-conscious shoppers.

What's more, marketing spending is shifting to digital media and broadcasting ads, which generate better returns. Home Depot also is testing an internal social-networking site, executives said at the meeting.

To spur discretionary spending, Home Depot has introduced promotions such as installing carpets for $139 or giving consumers more savings on items such as kitchen cabinets when they spend more.

The Atlanta-based company estimated its per-share profit to be flat to down 7%, with adjusted profit declining by 20% to 26%. That compared with its previous guidance of profit falling 7%, with an adjusted-basis drop of 26%.

Home Depot said it still expects sales to decline by about 9%, with comparable-store sales expected to fall in the high single-digit percentage. Gross margin is expected to be flat to slightly positive, the company said.

The "higher guidance reflects a more favorable outlook for the housing market in 2009 and disciplined expense control, as well as improved execution on its merchandising and supply chain initiatives," according to Citigroup analyst Deborah Weinswig.

Home Depot said it plans to achieve an operating margin of about 10% and a return on invested capital of about 15%.

The company, alongside smaller rival Lowe's, is benefiting from consumers growing their own gardens and taking on small repair and remodel jobs during the recession to save money, analysts say.

Both retailers have said consumers remained cautious on big-ticket purchases and discretionary spending. Foreclosure rates in California, one of Home Depot's top markets, saw a pickup in the first quarter.

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